BNP Paribas predicted that Hong Kong's equity market is unlikely to escape from the bearish cycle over the next 12 months and the Hang Seng Index (HSI) will linger below the 20,000-point level.

Erwin Sanft, managing director and head of mainland and Hong Kong research for BNP Paribas Securities (Asia), said the worst of the bearish cycle is almost over but the hangover effect will continue to loom over the market.

He said that the next phase of the bearish cycle is characterized by a narrow trading range and a decline in turnover.

Although 40 percent of the market capitalization of the equity market has evaporated as compared with the peak last year, Sanft said there is no bullish sign for the market in the 12-month horizon.

"The HSI is expected to hover below 20,000 most of the time next year... we recommend investors (retail) not to throw their money into the market at the moment," he said.

For the long run, Sanft suggested investors wager on finance, telecommunications and retail stocks such as PCCW and HSBC, but he advised them not to harbor their money in property and transport stocks.

Despite the sluggish forecast, he believed the price-to-earnings (PE) ratio of Hong Kong's equity market will stay above 10 times.

As for the mainland market, BNP Paribas Securities (Asia) director and head of mainland's small- and mid-cap research Charles Huang said that the PE ratio of A-share might drop to a historic low.

"The PE ratio of the A-share market could drop to 13.5 times next year," he said.

Huang added that the profit growth of mainland corporations will drop to single digit next year, and excessive non-tradable shares will liquidate with the A-share reform, which will bring enormous pressure to the mainland equity market.

He said the A-share market might fall another 20 percent if the global economy deteriorates and he predicted the mainland's gross domestic product growth will reduce to 8.9 percent in 2009.

Huang threw into doubt the effectiveness of the newly-released rate cut of the central bank, saying the policy is just to soothe the unease market sentiment.

To address the worsening economy, Huang suggested the central government should shift the economy from export-dominated to domestic-orientated.

He said the government should step up the effort to improve medical care, education and social security to boost domestic consumption.

(HK Edition 09/18/2008 page3)